Off the beaten path: US equities view



“I wish I knew where I was going to die, and then I’d never go there.” Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, has through the years used this notion to describe an approach to problem solving which he refers to as ‘inverting’ or addressing backward. That is to say, instead of asking how to create X, to turn the question around and ask how to create non-X*. Munger suggests that inverting in this manner is particularly useful when approaching hard problems.
Let’s give it a try. Often, investors ask themselves “how can I achieve great returns?” That is a hard problem, that when inverted asks “How can I achieve non-great returns?” Or, if you prefer, “How can I achieve disastrous returns?” There are of course a variety of ways to achieve non-great returns. Purchasing stock in a company with an excessively leveraged balance sheet just prior to encountering operating difficulties is one example. Buying a firm facing escalating industry pressures but with no competitive moat to support it is another.
A third method of achieving non-great returns is particularly relevant today: overpaying for an asset. Both logic and experience are clear on this point. Pay too rich a valuation and returns will ultimately suffer. Investors would do well to recognise that global stocks are expensive, and that the US market in particular is at the second or third most expensive point in its long history. Therefore, not only is the forward return outlook modest, but the downside risk – should the market revert to a ‘merely average’ historical valuation – has rarely been greater. Amid the bullish excitement, many investors are seemingly forgetting to ask themselves, “How can I achieve disastrous returns?” and are simply buying into the extremely expensive US market via passive index funds and ETFs.
These vehicles by design will capture 100% of any downside that materializes in the years ahead, along with 100% of the upside, not accounting for fees. Significant drawdowns and the damage they inflict on portfolios, spending/retirement plans, etc, could be considered the financial equivalent of Munger’s “death,” and investors should carefully focus on never going there.
Cyclically adjusted price/earnings (P/E) ratio indicates expensive US market

Source:, Vanguard, as at 31 January 2018.
Notes: The cyclically adjusted P/E ratio is defined as price divided by the average of 10 years of earnings, adjusted for inflation. Data shown are for the S&P 500 Index.
Still, the exercise of considering what one should not do leaves one wanting more. A particular area of current interest is ‘off-the-beaten-path’ kinds of securities. We believe that less mainstream holdings may be less exposed to the general bullishness we observe, and crucially less exposed to any reversal in this level of bullishness. Our research efforts are increasingly focused on stocks with minimal Wall Street/sell-side analyst coverage, management teams that are not overly promotional, and niche businesses with secular business drivers. While the mainstream Las Vegas casino may be well known, perhaps the Korean counterpart is more obscure, and therefore potentially the better bargain. Instead of the well-known diversified chemical company benefiting from current/cyclical dynamics, consider the niche operator well positioned for structural trends, and so on. In navigating today’s great bull market, we believe that the further a stock is from the optimistic headlines, the better.
Extending this idea to portfolio construction, we favor an eclectic mix of holdings. Yes, there will be favoured sectors, such as consumer staples, and individual holdings that should be bought with conviction. However, in such an expensive and seemingly uncertain market environment, remember to diversify. A healthy mix of different drivers of alpha has the potential to strengthen portfolios. A well-constructed portfolio should be able to withstand a variety of news headlines and potential economic outcomes, and not just the positive ones. Ultimately, as the market and many of its individual stock components become increasingly unattractive from a risk/reward standpoint, we want any portfolio we manage to be less like the market.
Looking back, the beginning of index fund investing was timed quite well. When Jack Bogle launched the First Index Investment Trust (now the Vanguard 500 Index Fund) in August 1976, the cyclically adjusted price/earnings ratio (CAPE) was 11.6x. Bogle initially ‘bought’ well below the then long-term average CAPE of 15.1x, thus aiding his forward returns potential. Fast-forward to today and buyers of the original passive index fund are paying 34x earnings, which, as shown in the chart, is historically expensive.
We believe that today’s index fund buyers are, in a way, ignoring Munger’s sage advice about inverting when trying to solve the hard problems, forgetting to analyse what actions might lead to non-great returns. Instead, we suggest looking off the beaten path for stock ideas, and building eclectic portfolios. Careful consideration of downside risk, while attempting to position portfolios to reduce drawdown capture to well below 100%, are of paramount importance today.

* A transcript of Charlie’ Munger’s speech to the Harvard school, 13 June 1986 can be found by following this link:


Please note: These are the manager’s views at the time of writing and do not represent a ‘house’ view. Past performance is not a guide to future performance. The value of an investment can fall as well as rise and you may not get back the amount originally invested.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Important information

Please read the following important information regarding funds related to this article.

Janus Henderson US Strategic Value Fund

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This material is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit

Specific risks

  • This fund is designed to be used only as one component of several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.

Risk rating


Important message